The Associated Press March 11, 2011, 6:17PM ET

Online retailers dump Ill. partners over tax law

Two major Internet retailers followed through Friday on threats to cut ties with Illinois businesses over a new law requiring them to collect sales taxes.

Amazon.com Inc. and Overstock.com Inc. both announced they're dumping Illinois-based "affiliates" -- people and businesses that refer customers to the Internet giants and then collect a commission on any sales.

Under the new law, having affiliates in Illinois requires an Internet company to collect sales taxes on all transactions with Illinois customers. Amazon said it will end relations with Illinois affiliates on April 15. Overstock said it will do the same on May 1.

Democratic Gov. Pat Quinn signed the law Thursday. The companies call it unconstitutional because they don't have offices, warehouses or personnel in Illinois.

"A long time ago, that was called taxation without representation," Jonathan Johnson, president of Overstock, said in an interview with The Associated Press.

There are 9,000 Internet retail affiliates in Illinois and 200,000 nationwide, said Rebecca Madigan, executive director of California-based Performance Marketing Association. Illinois leads the nation with nine "super affiliates" of 75-100 employees, she said.

Individuals can also be affiliates. Film critic Roger Ebert of the Chicago Sun-Times, for example, sometimes promotes Amazon products on his Twitter account. He wrote that Amazon is dropping him "in order to evade fair and just Illinois taxes."

Many larger affiliates work with multiple online retailers, not just Amazon or Overstock. Smaller affiliates may be more likely to work with just a single outlet. The governor's office said it will help former Amazon and Overstock affiliates connect with new Internet companies. Sears Holdings Corp., Wal-mart Stores Inc. and Barnes & Noble Inc. have all expressed interest.

Internet retailers face a wave of states trying to collect taxes on sales that have been ignored for years. On Thursday, bills similar to Illinois' new law scored initial legislative victories in both Arkansas and Vermont. New York, North Carolina and Rhode Island have adopted similar laws.

With their budgets in disarray, states are looking for ways to collect every tax dollar. Officials also argue Internet companies shouldn't get a price advantage over local brick-and-mortar businesses by avoiding sales taxes.

Amazon and similar companies have dropped affiliates in some of the other states requiring them to collect taxes. Madigan, of the marketing association, said those affiliates then saw 25 percent to 30 percent declines in revenue.

Johnson said many Illinois affiliates say they may move to a new state in order to maintain ties with Overstock. That was such a problem in Rhode Island, he said, that some legislators there are trying to repeal the law.

"What Rhode Island learned, and I think Illinois will learn, is ... we can easily terminate these affiliates without it affecting our revenue at all," Johnson said.

In its letter to affiliates, Amazon portrayed the new Illinois law as a way for national retailers to squelch Internet competition.

"We have enjoyed working with you and ... if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to Illinois residents," Amazon said.


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